HomeMy WebLinkAboutStaff Report 2401-2476Item No. 6. Page 1 of 16
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Utilities Advisory Commission
Staff Report
From: Dean Batchelor, Director Utilities
Lead Department: Utilities
Meeting Date: March 6, 2024
Staff Report: 2401-2476
TITLE
Staff Recommends the Utilities Advisory Commission Recommend that City Council Adopt a
Resolution Approving the Fiscal Year 2025 Water Utility Financial Plan, and Increase Water Rates
by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service From
Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General
Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service)
RECOMMENDATION
Staff requests that the Utilities Advisory Commission (UAC) recommend that the Council: Adopt
a resolution (Attachment A):
1. Approving the Fiscal Year (FY) 2025 Water Utility Financial Plan (Attachment A, Exhibit 1); and
2. Amending the following rate schedules to reflect increases effective July 1, 2024 (FY 2025):
W-1 (General Residential Water service), W-2 (Water Service from Fire Hydrants), W-3 (Fire
Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water
Service), and W-7 (Non-Residential Irrigation Water Service) (Attachment A, Exhibit 2)
EXECUTIVE SUMMARY
The City’s water rate schedules consist of a volumetric charge for each CCF (100 Cubic Feet or
748 gallons) of water consumed during the billing period and a monthly service charge for each
customer, based on water meter size. The volumetric charge has two parts: a wholesale
commodity rate (or San Francisco Public Utilities Commission or SFPUC wholesale rate), and a
customer volumetric rate. Water rates are designed to recover the City’s costs of buying and
distributing water while maintaining adequate financial reserves. The customer volumetric rate
and the monthly service charge together are considered the distribution rates; revenue from
those rates pay for the upkeep of Palo Alto’s distribution system. Revenue from the wholesale
commodity rate pays for the City’s cost of buying water from the SFPUC.
The fiscal year (FY) 2025 Water Utility Financial Plan includes projections of the utility’s costs and
revenues for FY 2024 through FY 2029. The Financial Plan anticipates costs will rise by about 5.9%
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per year on average over the next several years. Due to the drought and water conservation
efforts together with near record-setting precipitation and snowpack in the winter of 2022-2023,
the water utility’s sales revenue declined in FY 2023 by $4.864 million or 10% compared with
sales revenue in FY 2021. Funding from the Operations Reserve together with a $3 million
transfer from the Rate Stabilization Reserve to the Operations Reserve offset the revenue
declines. Net of supply cost savings, water sales were $2.4 million lower than forecasted. Demand
recovery is projected to be slow, and as occurred following prior droughts, some conservation is
projected to be permanent.
The Water Utility used available reserves to hold rates flat for two years (FY 2021 and FY 2022)
and manage two years of drought-related sales revenue reductions so far (FY 2022 and FY 2023).
The attached Financial Plan uses reserve funding from the Operations Reserve, Rate Stabilization
Reserve and CIP Reserve together with rate increases to manage the continuing decreased sales
revenue and increasing costs throughout the planning period. While these rate increases can be
perceived as decreasing the benefit of conservation, bills for customers who conserve will be
lower in the future than they would have been without conservation. Without the use of the Rate
Stabilization Reserve in FY 2024 and FY 2025, water distribution rate increases of at least 22%
would be needed in FY 2025. This Financial Plan projects that the Rate Stabilization Reserve will
be exhausted by the end of FY 2026 and begin to be refilled in FY 2029.
Customers have a separate commodity rate for purchased water from the San Francisco Public
Utilities Commission (SFPUC) relative to the rest of the distribution-related portion of the
volumetric rates. This commodity charge was passed-through to customers for a five year period
from July 1, 2020 through June 30, 2024 (Resolution 98441). The commodity rate is currently
$5.21 per hundred cubic feet (CCF) and will increase to $5.55 on July 1, 2024, according to
SFPUC’s February 15, 2024 forecast. The SFPUC will not determine its final wholesale customer
rate for FY 2025 until May or June 2024. Staff will use the Prop 218 process to request Council
approval to increase the commodity rate in accordance with SFPUC’s projections on July 1, 2024.
Additionally, staff will request Council approval to re-authorize the pass-through provision for
the water commodity charge for another five-year period from 2024 through 20292 for possible
future commodity charge increases during that time period.
BACKGROUND
1 Resolution 9844 https://www.cityofpaloalto.org/files/assets/public/v/1/city-clerk/resolutions/reso-
9844.pdf?t=69020.51
2 California Government Code Section 53756 (established by AB-3030) became effective January 1, 2009. This
section of the Code authorizes public agencies providing water, sewer, and garbage services to adopt automatic
pass-through rate adjustments to account for increases in wholesale water charges or wastewater treatment
charges, as well as inflation.
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Every year staff presents the UAC with Financial Plans for the Electric, Gas, Water, and
Wastewater Collection Utilities. The Financial Plans recommend rate adjustments required to
maintain the financial health of these enterprises. These Financial Plans include a comprehensive
overview of the operations of each enterprise, both retrospective and prospective, and are
intended to be a reference for UAC and Council members as they review the budget and staff’s
rate recommendations. Each Financial Plan also contains a set of Reserve Management Practices
describing the reserves for each utility and the management practices for those reserves.
All of the City’s potable water comes from the SFPUC’s Hetch Hetchy Regional Water System or
Regional Water System. This same system serves San Francisco and other Bay Area cities. San
Francisco operates the system, but as much as two thirds of the water is used outside of San
Francisco by 26 cities, water districts, and private utilities. These agencies, including the City, are
frequently referred to as the “wholesale customers” (as compared to the SFPUC’s “retail
customers” in San Francisco). The Bay Area Water Supply and Conservation Agency (BAWSCA)
represents the water supply and conservation interests of wholesale customers and negotiates
with the SFPUC on their behalf. BAWSCA also ensures contract compliance through regular
review of the SFPUC’s accounting and capital expenditures.3
The Water Utility has two main costs: water supply costs (primarily the cost of water delivered
to Palo Alto from the Regional Water System) and the costs of operating the distribution system
(the system of pipes, pumps, reservoirs, and other infrastructure that carries water to Palo Alto
customers). Both cost components have been increasing and are expected to continue to
increase.
For many years, the largest cost increases have been on the water supply side. This is due
primarily to major capital investments the SFPUC has made since 2010, which were undertaken
partly due to pressure from wholesale customers. The Water System Improvement Program
(WSIP) is a $4.8 billion capital improvement program, one of the largest in the country, to
rehabilitate and seismically strengthen the lower portions of the Regional Water System. One of
the goals is to achieve the capability to return to service within 24 hours after a major earthquake.
Although much of the work is complete, some of the projects are still under construction and
bond financing of WSIP projects over the next several years will continue to drive wholesale rates
up. The program has greatly improved the resiliency of the Hetch Hetchy Regional Water System
but has also led water supply costs to approximately double. Additionally, reduced regional water
demand as a result of drought and drought rebound together with relatively wet weather in 2023
has put upward pressure on wholesale rates. The third driver of wholesale rate increases is the
wholesale customer balancing account; SFPUC used a balance in this account owed to wholesale
customers to hold rates constant for five years and mitigate the need for rate increases during
the drought. However, the account is projected to have a $19.4 million balance owed to the City
of San Francisco by the end of the current fiscal year.
CPAU’s operational costs for the water utility have increased by approximately 6.5% per year
over the last five years; Resource Management, Customer Service, and Operations and
Maintenance costs were the primary reasons for the increase. Capital costs have fluctuated from
3 For a video summary of BAWSCA’s activities, see https://vimeo.com/283596665/5619ce2c11
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year to year and are projected to increase due to construction inflation as well as one-time capital
needs to replace or rehabilitate two reservoirs. This Financial Plan projects increases in capital
and operational costs that align similarly with the City’s Budget and Long-Range Financial
Forecast and average approximately 4% - 6% per year over the next five years.
ANALYSIS
Staff annually assesses the financial position of the City’s water utility to plan for adequate
revenue to fund operations, in compliance with the cost of service requirements set forth in the
California Constitution (Proposition 218). This includes making long-term projections of market
conditions, the physical condition of the system, and other factors that could affect utility costs,
and setting rates adequate to recover these costs. The current rate proposals are also based on
the cost of service (COS) methodology in the 2019 report by Raftelis Financial Consultants titled
“Proposed FY 2020 Water Rates,” (see Attachment Q4 to staff report 102955), which updated
methodology originally described in the 2012 Palo Alto Water Cost of Service & Rate Study, and
its subsequent updates in 2015
Proposed Actions
1. Increase rates for Rate Schedules W-1 (General Residential Water service), W-2 (Water
Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-
Metered and General Non-Residential Water Service), and W-7 (Non-Residential
Irrigation Water Service); and
2. Transfer up to $3.461 million from the CIP Reserve to the Operations Reserve in FY 2024.
3. Transfer up to $2.069 million from the Rate Stabilization Reserve to the Operations
Reserve in FY 2024.
The FY 2024 Water Utility Financial Plan describes these proposed actions in detail. Tables 1
through 4 below illustrate the current and proposed water distribution rates under the attached
Financial Plan. The rates shown below are exclusive of the commodity rate charged to customers
based on SFPUC supply charges. The commodity rate is currently $5.21 per CCF. SFPUC’s
proposed rate increase in FY 2025 is $5.55 per CCF (6.5% increase); the current rate would
increase on or around July 1, 2024. SFPUC is also proposing to increase the SFPUC meter charge
but has not yet finalized the impacts on that charge.
4 Staff Report 10295 Attachment Q https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-
reports/reports/city-manager-reports-cmrs/attachments/attachment-q-6055187-water-cosa.pdf?t=48180.98
5 A cost of service study (COS) is a study using industry-standard techniques to determine how the costs of running
the utility should be recovered from its customers; charges to each customer are set in proportion to the cost of
serving that customer.
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Table 1: Current and Proposed Water Consumption Charges
Current
(7/1/2023)
Proposed
(7/1/2024)
Change
($/CCF)
Change (%)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.72 3.07 0.35 13%
Tier 2 Rates 6.33 7.15 0.82 13%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.83 4.32 0.49 13%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.83 4.32 0.49 13%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.83 6.58 0.75 13%
Table 2 and Error! Reference source not found.Table 3 show the current monthly service
charges for rate schedules W-1, W-4 and W-7.
Table 2: Current and Proposed Monthly Service Charges for Residential W-1
Monthly Service Charge ($/month
based on meter size)
Change
Meter
Size Current
(7/1/2023)
Proposed
(7/1/2024)
$%
5/8” 21.48 24.27 2.79 13%
3/4” 21.48 24.27 2.79 13%
1” 21.48 24.27 2.79 13%
1 ½” 69.38 78.39 9.01 13%
2” 107.32 121.27 13.95 13%
3” 227.48 257.05 29.57 13%
4” 404.56 457.15 52.59 13%
6” 828.27 935.94 107.67 13%
8” 1,523.92 1,722.02 198.10 13%
10” 2,409.29 2,722.49 313.20 13%
12” 3,168.19 3,580.05 411.86 13%
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Table 3: Current and Proposed Monthly Service Charges for W-4 and W-7
Monthly Service Charge ($/month
based on meter size)
Change
Meter
Size Current
(7/1/2023)
Proposed
(7/1/2024)
$%
5/8” 18.78 21.22 2.44 13%
3/4” 25.11 28.37 3.26 13%
1” 37.76 42.66 4.90 13%
1 ½” 69.38 78.39 9.01 13%
2” 107.32 121.27 13.95 13%
3” 227.48 257.05 29.57 13%
4” 404.56 457.15 52.59 13%
6” 828.27 935.94 107.67 13%
8” 1,523.92 1,722.02 198.10 13%
10” 2,409.29 2,722.49 313.20 13%
12” 3,168.19 3,580.05 411.86 13%
Table 4 shows the current and proposed monthly service charges for rate schedule W-3.
Table 4: Current and Proposed Monthly Service Charges for Fire Services (W-3)
Monthly Service Charge ($/month
based on meter size)
Change
Meter
Size Current
(7/1/2023)
Proposed
(7/1/2024)
$%
2” 4.42 4.99 0.57 13%
4” 27.38 30.93 3.55 13%
6” 79.51 89.84 10.33 13%
8” 169.45 191.47 22.02 13%
10” 304.74 344.35 39.61 13%
12” 492.24 556.23 63.99 13%
Bill Impact of Proposal
Table 5 and Table 6 show the impact of the proposed July 1, 2024 rate changes on the median
residential, commercial and irrigation bills including the SFPUC commodity pass-through rate
increase of 6.5% or $5.55 per CCF. The bill increases shown in Table 6 vary by usage because the
SFPUC increase per CCF differs from the distribution rate increases.
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Table 5: Impact of Proposed Water Rate Changes on Residential Bills
Change
Usage (CCF/mo.)Bill under Current
Rates (7/1/2023)
Bill under Proposed
Rates (7/1/2024)$/mo.%
4 $53.20 $58.75 $5.55 10%
(Winter median) 7 $80.60 $88.69 $8.09 10%
(Annual median) 9 $103.68 $114.09 $10.41 10%
(Summer median)
14 $161.38 $177.59 $16.21 10%
25 $288.32 $317.29 $28.97 10%
Table 6: Impact of Proposed Water Rate Changes on Commercial Bills
Change Usage (CCF/mo.)Bill under Current
Rates (7/1/2023)
Bill under
Proposed Rates
(7/1/2024)$/mo.%
Commercial (W-4) (5/8” meters)
(Annual median) 12 $127.26 $139.66 $12.40 10%
(Annual average) 64 $597.34 $652.90 $55.56 9%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 $168.74 $187.56 $18.82 11%
(Summer median) 37 $477.86 $527.20 $49.34 10%
(Winter average) 56 $687.62 $757.67 $70.05 10%
(Summer average) 199 $2,266.34 $2,492.26 $225.92 10%
Staff expects median quantities of water use to decrease from pre-drought levels, however, as
calls for water conservation continue. Customers who conserve will experience less of a bill
increase than those customers who are not reducing water consumption.
FY 2025 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 7 shows the projected rate adjustments over the next five years and their impact on the
annual median residential water bill for 5/8” customers. These projected rate adjustments
include the impact of the commodity rate increasing consistent with SFPUC’s rate projection from
the February 15, 2024 Wholesale Customer meeting which forecasted a 6.5% in FY 2025 to $5.55
per CCF followed by 1.4% in FY 2026, 5.3% in FY 2027, 7.4% in FY 2028 and 3.6% in FY 2029.
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Table 7: Projected Rate Adjustments, FY 2025 to FY 2029 (5/8” meter)
Fiscal Year FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Water Utility 10%8%11%11%5%
Estimated Monthly Bill $114.09 $123.78 $137.45 $152.35 $160.12
Estimated Bill Impact ($/mo)1 $10.41 $9.69 $13.67 $14.90 $7.77
1) estimated impact on median monthly residential water bill for customers with 5/8” meter,
which is currently $103.68.
Figures 1 and 2 below illustrate the projected increases in the Water Utility’s costs between FY
2024 and FY 2029. Capital shown for FY 2024 includes an average of FY 2024 and FY 2023 and
reflects CIP dollars budgeted in prior years carried forward to FY 2024. Capital costs are increasing
more than supply and operations due to the replacement or rehabilitation of two reservoirs.
Figure 1: Projected FY 2024 and FY 2029 costs
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Figure 2: Percentage of Total Cost Increase From FY 2024 to FY 2029
Attributed to Supply, Capital, and Operations Costs
Water Supply Costs
The cost of water is a major driver for the increase in the Water Utility’s costs (and therefore
rates) in FY 2025. Wholesale water costs are adopted by the SFPUC, and generally have changed
on an annual basis. The SFPUC is currently engaged in a $4.8 billion Water System Improvement
Program (WSIP) for regional projects. As of June 30, 2023, 99.2% of the WSIP regional
construction contracts are complete.6 WSIP will continue to result in large increases in the annual
debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is
completed, wholesale customers must start paying the debt service costs within 3 to 4 years. For
most of those costs, funded with bond financing, the costs will be paid off over approximately 30
years.
6 Fourth Quarter FY 2022 - 2023 WSIP Regional Quarterly Report,
https://sfpuc.org/sites/default/files/documents/WSIP_Quarterly%20Report_FY2022-23_Q4.pdf The currently
estimated WSIP completion date is February 7, 2027, as adopted by the SFPUC in April of 2022.
51%
19%
30%
Contribution to FY 2024 to FY 2029
Cost Increases by Source
Water Supply Operations Capital
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As the SFPUC completes WSIP projects, the SFPUC is pursuing a suite of other capital
improvement work; dam safety improvements and Mountain Tunnel (a critical piece of
infrastructure used to move water from the Hetch Hetchy Reservoir to the Bay Area) repairs are
rate increase drivers during the next 10-year timeframe. Future and in-progress construction
work will require bond funding.
BAWSCA Revenue Bond Refunding
On January 5, 2023, BAWSCA completed the settlement of BAWSCA’s revenue bond series 2023A
to refund bonds issued in 2013 at a lower rate. BAWSCA locked-in the bond rates in October 2021
at an all-in true interest rate of 2.06%. The refunding bond transaction will generate
approximately $27.1 million in net present value savings over the term of the bonds, or an
average of approximately $2.5 million of savings per year for all Wholesale Customers, starting
in fiscal year 2022-23. The estimated net present value of savings per year for Palo Alto is
approximately $175,000.
Capital Projects & Reserves
The capital budget includes one-time seismic water system upgrades and/or replacements for
the Park and Dahl reservoirs to improve earthquake resiliency. This work will improve protection
from water loss at these reservoirs in a seismic event.
The attached Financial Plan also updates the transfer proposals due to project cost increases and
available reserve balances. For CIP, the Financial Plan assumes funding from rates will cover
$7.461 million of planned CIP in FY 2024. This figure is the portion of planned CIP in FY 2024 that
will not be paid for through funds collected in prior years (the FY 2024 Capital budget, less funds
available in the Reappropriations and Commitments Reserves at FY 2023 year’s end), shown in
line 13 of Table 9 for FY 2024. This capital budget is projected to be funded by the capital program
contribution of $4 million in FY 2024 together with $3.461 million from the CIP Reserve. Because
withdrawals from the CIP Reserve for use on capital projects require Council action,7 staff
requests Council approval to transfer up to $3.461 million from the CIP Reserve to the Operations
Reserve. The need for each of the transfers will be re-evaluated once the year-end reserve
balances for FY 2024 are known. The capital program contribution is lower than in future years
because reservoir rehabilitation project moved from FY 2024 to FY 2028 which delayed the need
for approximately $6 million of the capital funding by four years. Figure 3 shows the CIP Reserve
year-end balances.
7 See Section 5(b) of the Water Utility Reserves Management Practices; Appendix C to the attached Water Financial Plan.
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Figure 3: Actual FY 2023 and Projected Capital Reserve Balances FY 2024 to FY 2029
Figure 4 illustrates the year-end reserve balances for FY 2023 (actual) and projected through FY
2029. Although the CIP Reserve drops below the minimum guideline range in FY 2028, this is
temporary and is due to one-time reservoir replacement as one of the planned reservoir seismic
upgrades. The CIP Reserve returns to within the guideline in the following year and in all future
years. In accordance with the Water Utility Reserves Management Practices Section 5(c)
(included as Appendix C to the attached Financial Plan), the Council may approve a plan to
address a CIP Reserve below the minimum level within one or more years.
Water Utility Operation Reserve levels remain within guideline ranges at year-end FY 2023: the
CIP Reserve ending balance was $6.961 million and the Operations Reserve year-end balance for
FY 2023 was $7.957 million. There is also $6.069 million available in the Rate Stabilization Reserve
at year-end FY 2023. This Financial Plan uses reserve funding (from the Operations Reserve, Rate
Stabilization Reserve and CIP Reserve) together with rate increases to manage the decreased
sales revenue and increasing costs from FY 2025 through FY 2029.
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Figure 4: Actual Reserve Levels for FY 2023 and Projections through FY 2029
Rate Stabilization Reserve
Staff plans to use the Rate Stabilization Reserve balances to buffer the impact of current and
anticipated future rate increases. Staff expects to transfer $2.069 million from the Rate
Stabilization Reserve to the Operations Reserve in FY 2024 and $2 million from the Rate
Stabilization Reserve to the Operations Reserve in FY 2025, and in FY 2026. Utilizing the Rate
Stabilization Reserve balances in this manner, along with the cost and revenue projections
outlined in this Financial Plan, is anticipated to minimize the potential water distribution rate
increases to a level lower than they would be otherwise. This approach allows for smoothing of
rate increases across multiple years and ensures ongoing funding of crucial capital projects. This
Financial Plan projects that the Rate Stabilization Reserve will be exhausted by the end of FY 2026
(see line 7 in Table 9).
$0
$5
$10
$15
$20
$25
$30
$35
$40
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Actual Projections
Mi
l
l
i
o
n
s
Rate Stabilization
Reserve
Operations
Reserve
Capital Reserve
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Table 9: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution
To/(From) Reserves Projected for FY 2024 to FY 2029 ($000)
* Planned CIP (item 13) is reflected as an expense in the CIP Reserve and does not include CIP
funded through Reappropriations or Commitments reserves. This will be funded with the $4
million Capital Program Contribution (item 11) and $3.461 million from the CIP Reserve.
Water Bill Comparison with Surrounding Cities
Table 10 compares water bills for residential customers to those in surrounding communities as
of January 2024 (under current the City’s current water rates). Palo Alto customers have some of
the highest monthly bills of the group, although bills for smaller water users are lower than in
some surrounding communities. The bill difference between Palo Alto and neighboring
communities has decreased over the past several years as other agencies invest more in capital
improvement. It is unclear at this time what water rate changes may be implemented in
surrounding communities for FY 2025. The average community rate calculated in the following
table is the mean of the six surrounding communities listed. These communities are the same six
that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas and Electric
industries.
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Table 10: Residential Monthly Water Bill Comparison
Residential monthly bill comparison ($/month)*
As of February 2024
Usage
(CCF/month)
Palo
Alto
Menlo
Park
Mountain
View Hayward Redwood
City
Santa
Clara Los Altos
Average of
Surrounding
Communities
4 $53.20 $65.20 $46.95 $45.17 $64.16 $31.88 $58.71 $52.01
(Winter median) 7 80.60 91.00 72.69 69.59 86.27 55.79 79.51 75.81
(Annual median) 9 103.68 108.19 89.85 85.87 112.31 71.73 93.38 93.55
(Summer median)
14 161.38 155.10 132.75 135.87 180.22 111.58 131.23 141.12
25 288.32 271.23 278.63 245.87 340.49 199.25 233.01 261.41
*Based on the FY 2013 BAWSCA survey, the percentage of SFPUC as the source of potable water supply
was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for
Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC.
Changes from Last Year’s Financial Plan
Table 11 shows rate projections from the last two Financial Plans for FY 2022 and FY 2023 as well
as the impact of SFPUC’s wholesale rate increase projections when combined with Palo Alto’s
distribution rate increase.
Table 11: Proposed and Projected Water Revenue Changes for FY 2024 to FY 2028
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY 2025 Plan (Current)10%8%11%11%5%
FY 2024 Plan 4%3%4%6%-
FY 2023 Plan 3%2%0%--
Table 12 shows the FY 2025 Plan proposed water rate increases across the five-year forecast
period through FY 2029, separated out by increases to commodity revenues to cover the costs of
purchasing water from SFPUC (Table 12 line 1), and by the distribution revenue increases
necessary to pay for the upkeep of Palo Alto’s water distribution system (Table 12 line 2). Key
changes are the commodity increases projected by SFPUC, and for distribution rates, the reduced
water sales in Palo Alto and cost increases both in operating and capital costs over the forecast
period.
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Table 12: Proposed Commodity and Distribution Water Rate Changes FY 2025 to FY 2029
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
Commodity Rate (SFPUC Wholesale Rate
increases to $5.55 in FY 2025)
7%1%5%7%4%
Distribution Rate 13%14%15%13%6%
Total Rate 10%8%11%11%5%
This plan uses the Rate Stabilization Reserve to stabilize rates while anticipating 6.5% wholesale
water rate increase in FY 2025 and funding needed for critical water CIP budgets.
FISCAL/RESOURCE IMPACT
Staff projects estimated revenue for the Water Utility in FY 2025 to increase approximately 10%
($4.9 million) as a result of the proposed rate increases. The FY 2025 Budget is being developed
concurrent with these rates and, depending on the final rates, adjustments to the budget may
be necessary. See the FY 2025 Water Utility Financial Plan for a more comprehensive overview
of the projected cost and revenue changes for the next five years.
STAKEHOLDER ENGAGEMENT
At the Utilities Advisory Commission (UAC) January 2024 meeting, the Commission reviewed a
preliminary rate trajectory with 5% overall water rate increases each year. Staff did not request
a recommendation at that meeting; staff sought input from Commissioners regarding the
preliminary rate adjustment recommendations. Some Commissioners commented that staff
should consider higher rate increases and expressed concern about low reserve balances across
the utilities. Staff increased the rate trajectory for the distribution rates and discussed the revised
proposals with the Finance Committee on February 21, 2024; the Finance Committee’s feedback
will be described to the UAC during the March UAC meeting.
The Finance Committee in April will consider the water rate changes to recommend for Council’s
adoption. Assuming the Finance Committee supports the proposed rate adjustments, staff will
send notification of the potential rate increases to customers as required by Article XIIID of the
State Constitution (added by Proposition 218) expected in April 2024. The City Council will
consider the proposed Financial Plans and amended rate schedules with the FY 2025 budget,
expected in June, at which time the public hearing required by Article XIIID of the State
Constitution will be held.
ENVIRONMENTAL REVIEW
The UAC’s review and recommendation to Council on the FY 2025 Water Financial Plan and rate
adjustments does not meet the definition of a project requiring California Environmental Quality
Act (CEQA) review under Public Resources Code Section 21065 thus no environmental review is
required.
Item No. 6. Page 16 of 16
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ATTACHMENTS
Attachment A: Water FY25 Resolution
Attachment B: Water FY25 Presentation
AUTHOR/TITLE:
Dean Batchelor, Director of Utilities
Staff: Lisa Bilir, Senior Resource Planning